Fed taper odds double as jobless rate dips to 7%

Bloomberg

Sun, Dec 08, 2013 - Page 13

The share of economists predicting the US Federal Reserve will reduce bond buying this month doubled after a government report showed back-to-back monthly payroll gains of 200,000 or more for the first time in almost a year.

The US Federal Open Market Committee (FOMC) will probably begin reducing US$85 billion in monthly bond purchases at a meeting on Thursday and Friday, according to 34 percent of economists surveyed on Friday by Bloomberg, an increase from 17 percent in a Nov. 8 survey.

Last month, 53 percent predicted a tapering in March, compared with 40 percent in Friday’s poll.

The jobless rate fell to a five-year low of 7 percent last month as payrolls swelled by 203,000 after a revised 200,000 increase in October, the US Labor Department said on Friday.

The gain last month exceeded the 185,000 median forecast of 89 economists surveyed by Bloomberg.

“Clearly the economy is performing far better than the FOMC expected, and there’s no reason not to get started with tapering,” said James Smith, chief economist at Parsec Financial Management Inc in Asheville, North Carolina, and a former economist at the Fed. He predicts the Fed will reduce monthly purchases to US$65 billion this month.

The pickup in hiring — the biggest gain in three months — signals that companies are more confident demand will improve, while gains in wages and hours reported on Friday give US workers more reason to spend, as holiday shopping gets under way. Stocks rallied on bets the economy is strong enough to withstand a reduction in the Fed’s bond buying.

The payroll report puts the four-month average for gains at 204,000, and the six-month average at 180,000. Chicago Fed President Charles Evans, a supporter of record stimulus who votes on policy this year, said in April he wants gains of 200,000 a month for about six months before tapering.

Atlanta’s Dennis Lockhart, who does not vote, said several months of gains exceeding 180,000 would make slowing appropriate.

“The 200,000 number hits you right between the eyes,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd in New York. “That’s a number that everyone agrees the labor market is showing good-size gains, and the progress they’re making seems to be sustainable if that marker is met, which it was.”

The unemployment rate, derived from a separate Labor Department survey of households rather than employers, was forecast to fall to 7.2 percent.

In October, joblessness rose for the first time in five months, reflecting workers furloughed during a federal government shutdown that lasted half the month.

The FOMC has pledged to keep buying bonds until the “outlook for the labor market has improved substantially.”

The payroll and unemployment numbers “are impressive in terms of a stronger economy and the need to exit QE,” Pacific Investment Management Co’s Bill Gross said on Friday on Bloomberg Radio. He said the odds of a taper this month are “at least 50:50 now.”

The Thomson Reuters-University of Michigan preliminary consumer sentiment index for this month rose to 82.5, the highest in five months, from 75.1 last month. Economists forecast an increase to 76, according to the median estimate in a Bloomberg survey.

The Labor Department’s household survey showed more people were entering the labor force. The so-called participation rate rose to 63 percent last month, the first gain since June. A month earlier it fell to 62.8 percent, the lowest level since March 1978.

A report this week showed third-quarter growth was faster than initially estimated as GDP rose at a 3.6 percent annual rate, up from an initial estimate of 2.8 percent and the strongest since the first quarter of last year.